Cooling Off: Good for China/Good for the Markets

The equity markets have been volatile to the downside the past few days. The main reason for this is China. China has been raising the reserve requirements for some of their banks deemed to have less than adequate capital reserves.

Raising the reserve requirements effectively puts the brakes on lending. It does not bring credit availability to a screeching halt. It should have the effect of slowing the rate of borrowing, and cooling off China’s rapidly growing economy.

Rather than viewing this as a negative, we see this as a positive. In the past few months there has been growing concern that rapid growth in China was creating another bubble. By slowing the rate that credit is pumped into the system now, rather than later, China may be prolonging their ability to sustain their economic expansion, while eliminating the risk of creating a speculative bubble.

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